SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   Form 10-KSB

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1996
                                       OR
          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
Commission File No.0-28128

                             ELEGANT ILLUSIONS, INC.
                 (Name of small business issuer in its charter)

           Delaware                                    88-0282654
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

  542 Lighthouse Ave., Suite 5, Pacific Grove, CA                   93950
     (Address of principal executive offices)                     (Zip Code)

Issuer's telephone number  (408) 649-1814

Securities registered pursuant to Section 12(b) of the Act:     None
Securities registered pursuant to Section 12(g) of the Act:  Common Stock

Check  whether  the issuer  (1) has filed all  reports  required  to be filed by
Section 13 or 15(d) of the Exchange Act,  during the preceding 12 months (or for
such shorter  period that the  registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
                               Yes __X__ No _____

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained to the best
of  registrant's  knowledge,  in  definitive  proxy  or  information  statements
incorporated  by reference in Part III of this Form 10- KSB or any  amendment to
this Form 10-KSB.[ ]

The  Issuer's  revenues  for its  fiscal  year  ended  December  31,  1996  were
$7,319,259.

The aggregate market value of the voting stock held by non-affiliates (1) of the
registrant based on the closing bid price of such stock, as of March 12, 1997 is
$6,573,719  based upon $1.50  multiplied by the 4,382,478 Shares of Registrant's
Common Stock held by non-affiliates.

The number of shares  outstanding of each of the registrant's  classes of common
stock, as of December 31, 1996 and March 13, 1997 is 17,434,338  shares,  all of
one class of $.001 par value Common Stock.

(1) Affiliates for purposes of this item refers to those persons who, during the
preceding 3 months, were officers,  directors and/or owners of 5% or more of the
Company's outstanding stock.

DOCUMENTS INCORPORATED BY REFERENCE      See "Item 13."
Transitional Small Business Disclosure Format (check one):  Yes _____ No __X__
<PAGE>


                             ELEGANT ILLUSIONS, INC.
                                   Form 10-KSB
                          Year Ended December 31, 1996

                                Table of Contents
PART I                                                                     Page

Item 1.      Business........................................................1

Item 2.      Properties......................................................4

Item 3.      Legal Proceedings...............................................4

Item 4.      Submission of Matters to a Vote of
               Security Holders..............................................4

Part II

Item 5.      Market for Common
               Equity and Related Stockholder Matters........................4

Item 6.      Management's Discussion and Analysis of
               Financial Condition and Results of Operations.................6

Item 7.      Financial Statements............................................8

Item 8.      Changes in and Disagreements with
               Accountants on Accounting and
                 Financial Disclosures.......................................8

Part III

Item 9.      Directors, Executive Officers, Promoters
               and Control Persons; Compliance with
                 Section 16(a) of the Exchange Act...........................9

Item 10.          Executive Compensation.....................................10

Item 11.          Security Ownership of Certain Beneficial
               Owners and Management.........................................12

Item 12.          Certain Relationships and Related
               Transactions..................................................13

Part IV

Item 13.          Exhibits and Reports on Form 8-K...........................13

Signatures...................................................................14

Supplemental Information and Exhibits........................................15

Financial Statements.........................................................F-1
<PAGE>


                                     PART I


Item 1. Business.

General

     Elegant   Illusions,   Inc.  (the  "Company"),   through  its  wholly-owned
subsidiary, Elegant Illusions, Inc, a California corporation (the "Subsidiary"),
is primarily in the retail copy jewelry business and currently owns and operates
17 retail copy jewelry stores, two fine jewelry stores,  one handcraft,  jewelry
and gift store and one fine art  gallery.  The retail  copy  jewelry  stores are
located in Monterey,  San Francisco,  Santa Barbara,  San Diego,  Sacramento and
Palm  Springs,  California;  Salt  Lake  City,  Utah;  Minneapolis,   Minnesota;
Portland, Oregon; Branson, Missouri; New Orleans,  Louisiana;  Laughlin, Nevada;
Oahu, Hawaii; and St. Croix, U.S. Virgin Islands. One of the fine jewelry stores
and the  handcraft,  jewelry and gift store are located in Monterey,  the second
fine  jewelry  store is located in St. Croix and the fine art gallery is located
in New Orleans.

     During 1997, the Company plans to open four additional copy jewelry stores.
At this time, management believes,  but cannot assure, that these stores will be
located in Bellport, New York; Kenosha, Wisconsin; Fort Lauderdale,  Florida and
Gilroy,  California.  The Company  had  planned to open a location at  Universal
Studios in Orlando,  Florida;  however,  Universal Studios has delayed its plans
until 1988.

     The copy  jewelry  stores  sell  copies of fine  jewelry  including  rings,
pendants,  earrings,  necklaces,  bracelets,  pearl  enhancers  and  ear  charms
manufactured in 14 carat gold,  sterling  silver  vermeil,  gold bonded brass or
gold bonded white metal.  By using  synthetic  stones,  the Company  offers copy
jewelry at a fraction of the cost of real fine jewelry.

     The fine jewelry  stores,  Steinbeck  Jewelers  (Monterey)  and Kings Alley
Jeweler (St.  Croix),  sell fine jewelry  including rings,  pendants,  earrings,
necklaces,  bracelets,  manufactured in 10 carat, 12 carat and 14 carat gold and
other precious metals set with precious and semi-precious stones.

     The handcraft,  jewelry and gift store,  Steinbeck  Lady,  primarily  sells
jewelry,   including  rings,   pendants,   earrings,   necklaces  and  bracelets
manufactured in Sterling silver, other metals and other materials; gift items of
a marine nature; and some pottery.

     The fine art gallery,  Bourbon Street Gallery, sells predominantly original
oil paintings by contemporary Italian artists.

                                      - 1 -
<PAGE>


     The Company purchases its copy jewelry  merchandise  directly from a number
of manufacturers  located in and outside the United States; it does not purchase
from  distributors.  Products purchased include stock items and jewelry designed
by the Company.  The jewelry  sold in the fine  jewelry  stores and the products
sold in the handcraft,  jewelry and gift store are primarily  purchased directly
from  manufacturers  and, to a lesser  extent,  from  distributors.  The Company
purchases its Art for Bourbon  Street  Gallery  directly from the artists.  Less
than 5% of the  art  gallery's  revenues  are  generated  from  sales  of Art on
consignment.

     The Company's primary source of business results from "walk by" traffic and
word of mouth.  The Company also  advertises  in  magazines,  newspapers  and on
radio.  Management believes that its choice of strategic location is its primary
marketing tool. The Company's  stores are located in high  trafficked  locations
including  malls and tourist areas.  The strategic  locations of the stores also
helps mitigate seasonal  factors;  the tourist locations do higher volume during
the summer and  vacation  times while the mall and heavy  shopping  locations do
higher volume around the traditional holiday times (e.g., Christmas,  Valentines
Day and Mothers Day).

     At this time,  management  believes  that the  Company  has  little  direct
competition.  The Company  knows of three copy jewelry  retail store chains that
could  compete with the Company if they were located  within close  proximity of
the Company's  stores - Impostors,  Classic Copies and Landau Hyman.  Management
believes  that the Company  would be able to compete  even if stores were opened
within close  proximity of the  Company's  stores.  The  Company's  copy jewelry
stores also  compete  indirectly  with fine jewelry and costume  jewelry  retail
stores;  however,  due to the type of  merchandise  sold and the  difference  in
product  price  ranges,  such  competition  has  minimal  if any  affect  on the
Company's business.

     At March 3, 1996, the Company had approximately 94 employees, including its
three officers, four regional managers (who also function as store managers), 14
store managers, one training manager, two store  managers-in-training,  55 sales
personnel,  one distribution manager, one retail computer systems manager and 13
clerical personnel.

History

     The  Subsidiary  was  founded  on May 1, 1989 for the  purpose  of  selling
jewelry and jewelry store  franchises.  Its founders  incorporated  Copy Jewels,
Inc. ("CJI") in July 1989 for the purpose of supplying jewelry to the Subsidiary
and its franchise stores.

     The first  franchise  store opened in San Diego in  September  1989 and the
second  franchise store opened in Santa Barbara in July 1990.  These stores were
acquired by the Company in May 21, 1993.

                                      - 2 -
<PAGE>


     The first  Subsidiary-owned  store  opened  in  Sacramento  in March  1991,
followed  by a second in  Monterey  in May 1991 and a third in Salt Lake City in
July 1992. With the exception of the Subsidiary-owned  store in Monterey,  which
closed in January 1993, all of the stores are open and operating.

     Bay Area  Grand  Illusions,  Inc.  ("Bay"),  a  company  then  owned by the
Company's current management, opened a Subsidiary jewelry store in San Francisco
in May 1988. The San Francisco store relocated within Ghiradelli Square in April
1994.

     Prior to the Company's  acquisition of the  Subsidiary,  CJI and Bay merged
with and into the Subsidiary.

     During 1993 and 1994,  the Company opened three new copy jewelry stores per
year. In addition,  in 1994,  the Company,  through a newly formed  wholly-owned
subsidiary,  Bourbon Street,  Inc.,  entered into a partnership to sell original
oil paintings and other art in a storefront that opened on Bourbon Street in New
Orleans on September 15, 1994.  The art gallery  operates under the name Bourbon
Street  Gallery.  The Company funded the renting and build out of the storefront
location and the inventory of art. The  Company's  two  partners,  a husband and
wife team who are unaffiliated with the Company,  run the day-to-day  operations
of the store.  Material managerial  decisions are determined by the Company. The
Company and its partners split store profits on a 50-50 basis. Since the Company
funded the  partnership,  the Company will be entitled to receive all  remaining
inventory of the partnership after payment of partnership expenses.

     Effective  July  1,  1994,  the  Company  acquired  all of the  issued  and
outstanding shares of common stock of Cannery Row Enterprises, Inc. ("CRE") from
Gavin Gear and Tamara  Gear,  two officers  and  directors  of the  Company,  in
exchange for 150,000 shares of the Company's common stock. CRE owns three stores
- a copy jewelry  store,  a fine jewelry store and a gift store,  all located in
Monterey.

     During 1995,  the Company  opened one new copy  jewelry  store and one fine
jewelry store and during 1996, the Company opened three new copy jewelry stores.

     On January 30,  1997,  the  Company  closed its store at the  Pavilions  in
Sacramento,  California,  because  that  location was not  performing  up to the
Company's expectations.

                                      - 3 -
<PAGE>


Item 2. Properties.

     The Company moved its executive  offices to 542 Lighthouse  Ave.,  Suite 5,
Pacific Grove,  California  93950.  The new facility  consists of  approximately
5,700 square feet,  including  approximately 700 square feet of executive office
space,  approximately 1,600 square feet of administrative  space,  approximately
2,500  square  feet of  warehouse  space and  approximately  900 square  feet of
computer  and file space.  The  facility is leased  from an  unaffiliated  party
pursuant  to a three year  lease.  Initial  base rent is $3,300 per month,  plus
utilities.  Management  believes  that  the  current  executive  facilities  are
sufficient for its needs over the next three years.

     The Company's stores are leased from unaffiliated parties on various terms.
Certain of the  leases  provide  the  landlord  with a  percentage  of  revenues
generated at and from the specific  leased location (see Note 5 to the Company's
Consolidated Financial Statements).


Item 3. Legal Proceedings.

     The Company is not presently a party to any material  litigation not in the
regular  course  of its  business,  nor  to  the  Company's  knowledge  is  such
litigation threatened.


Item 4. Submission of Matters to a Vote of Security Holders.

     No matters were submitted to a vote of Security Holders in the last quarter
of the Company's fiscal year ended December 31, 1996.



                                     PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

     (a)  Marketing  Information  -- The  principal  U.S.  market  in which  the
Company's  Common Stock ($.001 par value,  all of which are one class) is traded
is  in  the  over-the-counter  market  (NASDAQ  SmallCap  Symbol:  "EILL").  The
Company's  Common Stock was listed for trading on the NASDAQ  Smallcap Market on
August 16,  1996.  Prior  thereto,  it traded in the  over-the-  counter  market
(Bulletin Board Symbol: "EILL").

     The following tables set forth the range of high and low bid prices for the
Company's Common Stock on a quarterly basis for the past fiscal year as reported
by the National  Quotation Bureau (which reflect  inter-dealer  prices,  without
retail  mark-up,  mark-down,  or commission  and may not  necessarily  represent
actual transactions).

                                      - 4 -
<PAGE>


                                  COMMON STOCK

                                                         Bid Prices
                                                   --------------------
                                                   High             Low
                                                   ----             ---


Period - Fiscal Year 1995

First Quarter ending March 31, 1995                2                1
Second Quarter ending June 30, 1995                2                3/4
Third Quarter ending September 30, 1995            2                1
Fourth Quarter ending December 31, 1995            2                1

Period - Fiscal Year 1996

First Quarter ending March 31, 1996                3                2
Second Quarter ending June 30, 1996                3.125            3
July 1, 1996 - August 15, 1996                     3.125            2.75
August 16, 1996 - September 30, 1996               3.1875           3
Fourth Quarter ending December 31, 1996            3.25             1.625


     (b)  Holders  -- There  were  approximately  67  holders  of  record of the
Company's  Common Stock as of March 12, 1997 inclusive of those  brokerage firms
and/or  clearing  houses holding the Company's  securities  for their  clientele
(with each such brokerage  house and/or  clearing house being  considered as one
holder).

     (c)  Dividends -- The Company has not paid or declared any  dividends  upon
its Common  Stock since its  inception  and, by reason of its present  financial
status and its  contemplated  financial  requirements,  does not  contemplate or
anticipate paying any dividends upon its Common Stock in the foreseeable future.

     In March 1996,  the Company  sold  606,061  shares of its common stock to a
foreign  investor for gross  proceeds of  $1,000,000  and paid a  commission  of
$50,000  on  the  transaction.  The  sales  of  these  shares  was  exempt  from
registration  by reason of the  exemption  provided by  Regulation S promulgated
under the Securities Act of 1933 (the "Act").

     In April 1996,  the Company  sold  100,000  shares of its common stock to a
supplier in exchange for inventory valued at $200,000. The sales of these shares
was exempt from registration by reason of the exemption  provided by Rule 506 of
Regulation D promulgated under the Act.

                                      - 5 -
<PAGE>


Item 6. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations.1

Results of Operations

Fiscal Year ended  December 31, 1996 Compared to Fiscal Year Ended  December 31,
1995

     Sales for the year ended December 31, 1996 increased $1,381,980 or 23% when
compared to the year ended December 31, 1995.

     Management  believes  that the increase in sales was due to the addition of
three  locations  (San  Francisco,  Monterey  and  Laughlin)  and a full year of
operations at the two stores in St. Croix (copy jewelry and fine jewelry).

     As of December 31, 1995, the Company operated 18 retail locations and as of
December 31, 1996, the Company operated 21 retail locations.

     The Costs of goods as a percentage of revenues  increased slightly from 29%
in fiscal 1995 to 31% in fiscal 1996.

     During fiscal 1996, selling,  general and administrative expenses increased
when  compared  to  fiscal  1995 by  $605,559  (approximately  20%).  Management
believes that this increase was primarily the result of: (i) the cost of opening
three new stores;  and (ii) the costs related to operating the two stores opened
in 1995 for a full 12  months.  However,  as a  percentage  of  sales,  selling,
general and administrative expenses decreased from approximately 53% during 1995
to approximately 51% during 1996.

     Revenues same store locations.

     As of December  31, 1995,  the Company  operated 18  locations:  two in New
Orleans,  three in Monterey,  two in Sacramento,  one in San Diego, one in Santa
Barbara,  one in San Francisco,  one in Palm Springs, one in Salt Lake City, one
in Portland, one in Branson one in Minneapolis, two in St Croix and one in Oahu.
Revenues  from these  locations for the year ended  December 31, 1996  increased
approximately  11% from the  same  period  in  1995.  Management  believes  this
increase was primarily  due the fact that the two locations  opened in 1995 were
in operation for the full twelve month period in fiscal 1996. Excluding revenues
from  the  two  St  Croix  stores,  in  1996,  same  store  revenues   increased
approximately 4% from the same period in 1995.

--------
     1    The following discussion takes into account certain  reclassifications
          of balances to the 1995 Consolidated  Financial  Statements to conform
          to the presentation of the 1996 Consolidated Financial Statements (see
          Note 1 to the Consolidated Financial Statements).

                                      - 6 -
<PAGE>


Liquidity and Capital Resources

     As of  December  31,  1996,  the Company  had  $1,886,297  in cash and cash
equivalents  and  its  current  assets  exceeded  its  current   liabilities  by
$3,947,642.

     During 1997, the Company plans to open four additional copy jewelry stores.
At this time, management believes,  but cannot assure, that these stores will be
located in Bellport, New York; Kenosha, Wisconsin; Fort Lauderdale, Florida, and
Gilroy, California.

     Management  believes  that it will cost  approximately  $1,050,000  to open
these three new stores.  Management  believes that the cost of opening these new
store will be paid from current cash  reserves.  No assurance can be given as to
the actual number of stores that the Company will open during 1997.

     The Company has a $1,000,000 line of credit with a bank effective  December
1996 due on demand.  Interest  is at annual base rate as  announced  by the bank
(initial base rate was 8.25%) plus 1.75%.  This line of credit is collateralized
by the Company's accounts receivable,  inventory and equipment. The Company also
is required to maintain certain  financial ratios and covenants.  As of December
31, 1996 and the date hereof,  no funds had been advanced on the line of credit.
As of the date hereof,  the Company is in compliance  with all financial  ratios
and covenants.

                                      - 7 -
<PAGE>


Item 7. Financial Statements.

     The  following  consolidated  financial  statements  have been  prepared in
accordance with the requirements of Item 310(a) of Regulation S-B.


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1995 AND 1996


Report of Independent Auditors ...............................   F-1

Consolidated Balance Sheets at December 31, 1995 and 1996.....   F-2

Consolidated Statements of Operations - ......................   F-3
         Years Ended December 31, 1995 and 1996

Consolidated Statement of Stockholders' Equity - .............   F-4
         Years Ended December 31, 1995 and 1996

Consolidated Statements of Cash Flows - ......................   F-5
         Years Ended December 31, 1995 and 1996

Notes to Consolidated Financial Statements ...................   F-6



<PAGE>


                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
Elegant Illusions, Inc.

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Elegant
Illusions,  Inc.  and  Subsidiaries  as of December  31, 1995 and 1996,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows  for  the  years  then  ended.   These   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  financial  statements  based on our audits.  

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Elegant
Illusions,  Inc.  and  Subsidiaries  as of  December  31,  1995 and 1996 and the
consolidated results of operations,  stockholders' equity and cash flows for the
years then ended, in conformity with generally accepted accounting principles.

                                                        Hollander, Gilbert & Co.

Los Angeles, California 
February 27, 1997

                                      F-1
<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
                                                                            1995          1996
                                                                        -----------   -----------
<S>                                                                     <C>           <C>        
ASSETS
CURRENT ASSETS
         Cash and cash equivalents ..................................   $ 1,699,110   $ 1,886,297
         Accounts receivable ........................................       103,876       190,270
         Inventory ..................................................     1,369,348     1,990,174
         Prepaid expenses ...........................................        17,915        45,643
                                                                        -----------   -----------
                  TOTAL CURRENT ASSETS ..............................     3,190,249     4,112,384
                                                                        -----------   -----------
PROPERTY AND EQUIPMENT, NET (Note 2) ................................       751,181       884,707
                                                                        -----------   -----------
OTHER ASSETS
         Deposits ...................................................        46,740        55,764
Patents and trademarks, net of accumulated amortization
 of $648 and $928 in 1995 and 1996, respectively ....................         4,078         3,798
Excess cost over net assets acquired, net of accumulated amortization
 of $10,506 and $14,556 in 1995 and 1996, respectively ..............        30,341        26,291
                                                                        -----------   -----------
                  TOTAL OTHER ASSETS ................................        81,159        85,853
                                                                        -----------   -----------
                                                                        $ 4,022,589   $ 5,082,944
                                                                        ===========   ===========
                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
         Note payable - bank (Note 3) ...............................   $   750,000   $      --
         Accounts payable and accrued expenses ......................       119,982        92,827
         Income taxes payable (Note 4) ..............................          --          71,915
                                                                        -----------   -----------
                  TOTAL CURRENT LIABILITIES .........................       869,982       164,742
NOTE PAYABLE (Note 3) ...............................................       100,000        20,000
DEFERRED INCOME TAXES (Note 4) ......................................        69,778        95,871
                                                                        -----------   -----------
                  TOTAL LIABILITIES .................................     1,039,760       280,613
                                                                        -----------   -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (Note 6)
Common stock - authorized 30,000,000 shares, $.001 par value,
issued and outstanding 16,728,277 and 17,434,338 in
1995 and 1996,  respectively ........................................        16,728        17,434
         Additional paid-in capital .................................     1,828,927     2,978,221
         Retained earnings ..........................................     1,137,174     1,806,676
                                                                        -----------   -----------
                  TOTAL STOCKHOLDERS' EQUITY ........................     2,982,829     4,802,331
                                                                        -----------   -----------
                                                                        $ 4,022,589   $ 5,082,944
                                                                        ===========   ===========
</TABLE>
          See accompanying Notes to Consolidated Financial Statements.
                                      F-2
<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996


                                                   1995         1996
                                               -----------   -----------

REVENUES ...................................   $ 5,937,279   $ 7,319,259

COST OF GOODS SOLD .........................     1,722,162     2,234,297
                                               -----------   -----------
GROSS PROFIT ...............................     4,215,117     5,084,962
EXPENSES
         Selling, general and administrative     3,133,440     3,738,999
         Depreciation and amortization .....       178,890       225,416
         Interest expense ..................        12,312         9,445
                                               -----------   -----------
                  TOTAL EXPENSES ...........     3,324,642     3,973,860
                                               -----------   -----------
INCOME BEFORE INCOME TAXES .................       890,475     1,111,102
PROVISION FOR INCOME TAXES (Note 4) ........       366,959       441,600
                                               -----------   -----------
NET INCOME .................................   $   523,516   $   669,502
                                               ===========   ===========

WEIGHTED AVERAGE SHARES OUTSTANDING ........    16,639,821    17,291,661
                                               ===========   ===========

NET INCOME PER COMMON SHARE ................   $       .03   $       .04
                                               ===========   ===========

          See accompanying Notes to Consolidated Financial Statements.
                                      F-3
<PAGE>



                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
                                               Common Stock
                                          ------------------------   Additional
                                             Shares                   Paid-in      Retained
                                          Outstanding   Amount        Capital      Earnings       Total
                                          -----------   ----------   ----------   ----------   ----------

<S>                                        <C>          <C>           <C>         <C>          <C>       
BALANCE, December 31, 1994 .............   16,346,800   $   16,347    1,479,308   $  613,658   $2,109,313

         Sale of stock .................      381,477          381      349,619         --        350,000

         Net income for the year .......         --           --           --        523,516      523,516
                                           ----------   ----------   ----------   ----------   ----------

BALANCE, December 31, 1995 .............   16,728,277       16,728    1,828,927    1,137,174    2,982,829

         Sale of stock .................      606,061          606      949,294         --        950,000

         Issuance of stock for inventory      100,000          100      199,900         --        200,000

         Net income for the year .......         --           --           --        669,502      669,502
                                           ----------   ----------   ----------   ----------   ----------

BALANCE, December 31, 1995 .............   17,434,338   $   17,434   $2,978,221   $1,806,676   $4,802,331
                                           ==========   ==========   ==========   ==========   ==========
</TABLE>
          See accompanying Notes to Consolidated Financial Statements.
                                       F-4
<PAGE>



                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
                                                                    1995           1996
                                                                 -----------    -----------
<S>                                                              <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income .................................................   $   523,516    $   669,502
  Adjustments to reconcile net income to
   net cash provided by operating activities:
    Depreciation  and  amortization ..........................       178,890        225,416
    Changes in operating assets and liabilities:
    (Increase) decrease in:
     Accounts receivable .....................................        (8,542)       (86,394)
     Inventory ...............................................      (249,080)      (620,826)
     Prepaid expenses ........................................       (11,788)       (27,729)
    Increase (decrease) in:
     Accounts payable and accrued expenses ...................        19,684        (27,155)
     Income taxes payable and deferred income taxes ..........         4,078         98,008
                                                                 -----------    -----------
    NET CASH PROVIDED BY OPERATING ACTIVITIES ................       456,758        230,822
                                                                 -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property and equipment .........................      (278,943)      (354,611)
  Deposits ...................................................        (4,000)        (9,024)
                                                                 -----------    -----------
    NET CASH USED IN INVESTING ACTIVITIES ....................      (282,943)      (363,635)
                                                                 -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds (payments) from bank credit line, net .............       750,000       (750,000)
  Principal reduction of note payable ........................          --          (80,000)
  Payments to stockholders/officers ..........................       (10,000)          --
  Sale of common stock .......................................       350,000      1,150,000
                                                                 -----------    -----------
     NET CASH PROVIDED BY FINANCING ACTIVITIES ...............     1,090,000        320,000
                                                                 -----------    -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................     1,263,815        187,187
CASH AND CASH EQUIVALENTS BALANCE, Beginning of period .......       435,295      1,699,110
                                                                 -----------    -----------
CASH AND CASH EQUIVALENTS BALANCE, End of period .............   $ 1,699,110    $ 1,886,297
                                                                 ===========    ===========


SUPPLEMENTAL CASH FLOW DISCLOSURE:
  Interest paid ..............................................   $    12,312    $     9,445
  Income taxes paid ..........................................   $   362,881    $   330,517
</TABLE>
          See accompanying Notes to Consolidated Financial Statements.
                                      F-5
<PAGE>


                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1995 AND 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization  and  Description  of  Business  -  Elegant  Illusions,   Inc.  was
incorporated  in Delaware  in March  1988.  The Company is engaged in the retail
sale of  fine  jewelry  in two  locations  and  copy  jewelry  at  locations  in
California,  Nevada, Utah, Minnesota,  Missouri,  Oregon, Louisiana,  Hawaii and
U.S.  Virgin  Islands.  Copy jewelry  items are  replications  of fine  jewelry,
manufactured with synthetic stones set in 14 carat gold, sterling silver vermeil
or plated  brass.  In  addition,  the  Company  sells  original  oil  paintings,
lithographs and other art in its store in New Orleans.

Principles of Consolidation - The financial  statements  include the accounts of
the Company and its  wholly-owned  subsidiaries.  All  significant  intercompany
transactions and balances have been eliminated.

Cash and Cash  Equivalents - Cash  equivalents are purchased  short-term  highly
liquid investments  readily  convertible to cash with original  maturities of no
more than three months.

Inventories - Inventories  are stated at the lower of cost or market  determined
on a first-in, first-out (FIFO) basis.

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted accouting  principles  requires  management to make estimates
and  assumptions   that  affect  certain   reported   amounts  and  disclosures.
Accordingly, actual results could differ from those estimates.

Impairment  of  Long-Lived  Assets  -  The  Company  periodically  assesses  the
recoverability  of  the  carrying  amounts  of  long-lived   assets,   including
intangible assets. A loss is recognized when expected  undiscounted  future cash
flows are less than the carrying amount of the asset. The impairment loss is the
difference  by which the carrying  amount of the assets  exceeds its fair value.
The Company does not expect to have any  significant  losses  resulting from its
review of impairment of long-lived assets.

Stock-Based  Compensation - The Company plans to account for stock options under
SFAS No. 123,  which retains the original  accounting  prescribed by APB Opinion
No. 25. As a result, options granted at fair value will not result in charges to
earnings.  Disclosures will be made,  however,  of compensation costs determined
under SFAS No. 123's fair value methodology.

Property and Equipment - Property and equipment is stated at cost.  Depreciation
is computed on the straight-line  method based upon the estimated useful life of
the asset. Useful lives are generally as follows:

     Office furniture, fixtures & equipment       5-7 years

     Store furniture, fixtures & equipment        5-7 years

     Leasehold improvements                       5-7 years

Patents and Trademarks - The costs of patents and trademarks are being amortized
on the straight line method over a 17 year life.

Excess cost over net assets acquired - The excess of cost over fair value of net
assets acquired related to acquisition of the Company's two franchised stores is
being amortized over 10 years on a straight line basis.

Income Taxes - The Company uses the asset and liability method of accounting for
income taxes.  The  objective of the asset and liability  method is to establish
deferred tax assets and  liabilities for the temporary  differences  between the
financial  reporting  basis  and the  tax  basis  of the  Company's  assets  and
liabilities  at enacted tax rates expected to be in effect when such amounts are
realized or settled.


Reclassifications - Certain 1995 balances have been reclassified to conform with
1996 presentation.

                                      F-6
<PAGE>



                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


2. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 1995 and 1996:

                                                        1995         1996
                                                     ----------   ----------

Office furniture, fixtures & equipment ...........   $   96,920   $  100,845
Store furniture, fixtures & equipment ............      764,989    1,032,269
Vehicles .........................................       19,500       19,500
Leasehold improvements ...........................      291,084      374,491
                                                     ----------   ----------
                                                      1,172,493    1,527,105
   Less: accumulated depreciation and amortization      421,312      642,398
                                                     ----------   ----------
                                                     $  751,181   $  884,707
                                                     ==========   ==========


3. NOTES PAYABLE

The Company has entered  into a loan  agreement  with an  individual  who loaned
$100,000 in March 1990 without a due date requiring monthly interest payments of
$850 (10% per annum). The amount is deemed long term as the creditor in the past
has not requested payoff. The Company repaid $80,000 of the loan during 1996.

The Company has a $1,000,000 line of credit with a bank effective  December 1996
due on demand. Interest is at annual base rate as announced by the bank (initial
base rate was 8.25%) plus  1.75%.  The line of credit is  collateralized  by the
Company's accounts receivable,  inventory and equipment.  The Company shall also
maintain  certain  financial  ratios and covenants.  As of December 31, 1996, no
amount was due on the  creditline.  

4. INCOME TAXES

The  components of income tax expense for the years ended  December 31, 1995 and
1996 follow:

                     Federal          State            Total
                    ---------       ---------        ---------

1995:
   Current          $ 250,000       $  76,000        $ 326,000
   Deferred            34,000           6,959           40,959
                    ---------       ---------        ---------
                    $ 284,000       $  82,959        $ 366,959
                    =========       =========        =========


1996:
   Current          $ 338,000       $  74,000        $ 412,000
   Deferred            23,600           6,000           29,600
                    ---------       ---------        ---------
                    $ 361,600       $  80,000        $ 441,600
                    =========       =========        =========


The  component  of deferred tax  liability  was as follows at December 31, 1996:
Deferred tax liability:
Depreciation                        $  95,871
                                    =========

                                      F-7
<PAGE>



                    ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

Income tax expense  amounted to $366,959 in 1995 and $441,600 in 1996 (effective
tax rates of 41% and 40%, respectively). The actual tax expense differs from the
expected tax expense (computed by applying the Federal corporate tax rate of 34%
to earnings before income taxes) as follows:

                                                    1995           1996
                                                  ---------      ---------
Expected statutory tax                            $ 302,700      $ 377,775
State income tax, net of federal tax benefit         50,100         68,200
Other                                                14,159         (4,375)
                                                  ---------      ---------

         Actual tax                               $ 366,959      $ 441,600
                                                  =========      =========


5. OPERATING LEASES

The Company leases its office and retail store facilities and certain  equipment
under  operating  leases with terms ranging from three to ten years.  Certain of
the leases include percentage rates of 3% to 12% of revenues as defined.  Future
minimum  lease  payments  by  year  and in the  aggregate,  under  noncancelable
operating leases with initial or remaining lease terms in excess of one year, as
of December 31, 1996 are as follows:

               Year Ended 
              December 31,
              ------------
                 1997                $   776,906
                 1998                    780,404
                 1999                    557,703
                 2000                    274,818
                 2001                     43,473
                 Thereafter               97,162
                                     -----------
                                     $ 2,530,466
                                     ===========


Rent expense for the fiscal years ended December 31, 1995 and 1996 were $726,126
and $1,014,489, respectively.

6. STOCKHOLDERS' EQUITY

During 1995 the Company sold 381,477 common shares for $350,000. During 1996 the
Company sold 606,061  common shares for $950,000,  net and also,  issued 100,000
common  shares,  valued  at  approximately  $200,000,  in  connection  with  its
acquisition of inventory.

                                      F-8
<PAGE>



Item 8.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosures.

     There  have  been no  changes  in,  or  disagreements  with  the  Company's
independent  accountants with respect to accounting and/or financial disclosure,
during the past two fiscal years.

                                      - 8 -
<PAGE>


                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; compliance
        with Section 16(a) of the Exchange Act.


    Name                                    Position(s) Held

    James Cardinal                          Chief Executive Officer and Director

    Gavin Gear                              President and Director

    Tamara Gear                             Secretary-Treasurer and a Director

     The foregoing persons became officers and directors of the Company upon the
consummation  of the Company's  acquisition  of the  Subsidiary in May 1993. Mr.
Cardinal was President  and Mr. Gear was Vice  President of the Company from May
1993 until May 1994, at which time Mr. Gear became President.

     Directors   are  elected  to  serve  until  the  next  annual   meeting  of
stockholders  and until their  successors  have been elected and have qualified.
Officers  are  appointed  to serve until the  meeting of the Board of  Directors
following the next annual  meeting of  stockholders  and until their  successors
have been elected and have qualified.

     A summary of the business  experience  for each officer and director of the
Company is as follows:

     JAMES CARDINAL,  age 50, has been a Director of Subsidiary since 1992 and a
business  consultant  for  Subsidiary  since 1989. He was a Director of Bay from
June  1992  until  it s  merger  in to the  Subsidiary.  Prior  thereto,  he was
self-employed  as a  business  consultant  and  capital  organizer  to  start-up
companies.

     GAVIN  GEAR,  age 45,  was a  founder  and has  been the  President,  Chief
Financial  Officer and a Director  of the  Subsidiary  since 1989.  Mr. Gear was
President,  Chief  Financial  Officer  and a Director of CJI from 1989 until its
merger in to the  Subsidiary and President and a Director of Bay from 1988 until
its merger in to the  Subsidiary.  Since 1979,  he also has been the  President,
Chief  Financial  Officer and a Director of CRE. CRE was acquired by the Company
in July 1994.

                                      - 9 -
<PAGE>


     TAMARA GEAR, age 38, was a founder and has been the Secretary-Treasurer and
a Director of the Subsidiary since 1989. She was the  Secretary-Treasurer  and a
Director of CJI (from 1989) and of Bay (from 1988) until their  merger in to the
Subsidiary.  Since 1985,  she also has been an officer an director of CRE.  From
1984 to 1985, Ms. Gear was a gemologist for Sun Studies in Carmel.  From 1980 to
1984, she was the retail manager for Cannery Row Enterprises.

Compliance With Section 16(a) of The Securities Exchange Act of 1934

     To the Company's  knowledge,  based solely on a review of such materials as
are required by the Securities and Exchange Commission,  no officer, director or
beneficial  holder  of  more  than  ten  percent  of the  Company's  issued  and
outstanding shares of Common Stock failed to timely file with the Securities and
Exchange  Commission  any form or report  required  to be so filed  pursuant  to
Section  16(a) of the  Securities  Exchange  Act of 1934  during the fiscal year
ended September 30, 1996, except that Gavin and Tamara Gear filed Forms 5 late.



Item 10. Executive Compensation.

     The following table shows all the cash  compensation  paid or to be paid by
the  Company  or its  parent,  as well as  certain  other  compensation  paid or
accrued,  during the fiscal  years  indicated,  to the Chief  Executive  Officer
("CEO")  for such  period in all  capacities  in which he served.  No  Executive
Officer  received  total annual  salary and bonus in excess of  $100,000.  Total
compensation  paid to all three  executive  officers as a group  during 1996 was
$190,282.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                            Long-Term Compensation
                                                                    -----------------------------------
                                   Annual Compensation                     Awards           Payouts
                             --------------------------------       ------------------ ----------------
        (a)                    (b)     (c)     (d)      (e)            (f)       (g)      (h)     (i)
--------------------         ------- ------- ------- --------       --------- -------- --------- ------
                                                       Other         Restrict-                   All Other
                                                       Annual        ed Stock            LTIP    Compensa
Name and Principal                             Bonus   Compen-       Award     Options  Payouts  -tion
 Position                     Year*   Salary    ($)    sation($)       ($)      SARs      ($)       (i)
--------------------         -------  ------- -------  ---------    --------- -------- --------- ------

<S>                        <C>      <C>          <C>       <C>          <C>      <C>       <C>      <C>
James Cardinal             1996     59,394       0         0            0        0         0        0
 CEO                       1995     54,108       0         0            0        0         0        0
                           1994     21,000       0         0            0        0         0        0
</TABLE>
                                     - 10 -
<PAGE>


     The following table sets forth  information  with respect to the Executives
concerning  the grants of options and Stock  Appreciation  Rights ("SAR") during
the past fiscal year:

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
                                Individual Grants

  (a)                 (b)             (c)               (d)              (e)
----                -------     ----------------   ----------------   ----------
                                Percent of Total    
                                Options/SARs
                    Options/    Granted to
                    SARs        Employed in        Exercise or Base   Expiration
Name                Granted     Fiscal Year        Price ($/SH)       Date
----                -------     ----------------   ----------------   ----------

James Cardinal        0               0                  0




     The following table sets forth  information  with respect to the Executives
concerning  exercise  of options  during the last  fiscal  year and  unexercised
options and SARs held as of the end of the fiscal year:

         Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR
  (a)                 (b)             (c)          (d)               (e)
----              ------------     --------    -------------    ----------------
                                                                Value of
                                               Number of        Unexercised
                                               Unexercised      In-the-Money
                                               Options/SARs     Option/SARs
                  Shares                       at FY-End(#)     at FY-End(#)
                  Acquired on      Value       Exercisable/     Exercisable/
Name              Exercise (#)     Realized    Unexercisable    Unexercisable(1)
----              ------------     --------    -------------    ----------------

James Cardinal        0                0             0                 0



     The following table sets forth  information  with respect to the Executives
concerning awards under long term incentive plans during the last fiscal year:

                    Estimated Future Payouts under Non-Stock

                                Price Based Plans

(a)                  (b)             (c)           (d)         (e)        (f)
----             ------------   -------------   ---------    --------   --------
                                Performance
                 Number of      or Other
                 Shares,Units   Period Until
                 or Other       Maturation or   Threshold    Target     Maximum
Name             Rights(#)      Payout          ($ or #)     ($ or #)   ($ or #)
----             ------------   -------------   ---------    --------   --------

James Cardinal        0              0              0           0          0

                                     - 11 -
<PAGE>


     Directors are not  compensated  for acting in their  capacity as Directors.
Directors are reimbursed for their  accountable  expenses  incurred in attending
meetings and conducting their duties.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

     (a) Security  Ownership of Certain  Beneficial Owners -- The persons listed
in the chart below are known to the Company to be the beneficial  owners of more
than 5% of the  17,434,338  Shares of the  Company's  outstanding  Common Stock,
$.001 par value, as of March 13, 1997.

     (b) Security Ownership of Management -- The number and percentage of Shares
of Common Stock of the Company owned of record and  beneficially by each officer
and director of the Company and by all officers and  directors of the Company as
a group are set forth on the chart below.

Name and Address                           Amount of Record
of Beneficial                              and Beneficial             Percent of
    Owner                                    Ownership                Class
----------------                           ----------------           ----------

James C. Cardinal                              6,380,000                36.6%
542 Lighthouse Ave., Suite 5
Pacific Grove, CA  93950

Gavin M. Gear                                  3,346,930(1)             19.2%
542 Lighthouse Ave., Suite 5
Pacific Grove, CA  93950

Tamara Gear                                    3,324,930(1)             19.1%
542 Lighthouse Ave., Suite 5
Pacific Grove, CA  93950

All Officers and
Directors as a Group
  (3 Persons)                                 13,051,860                74.9%



(1)  Gavin and Tamara  Gear are husband  and wife.  The shares  listed for Gavin
     Gear do not include the shares  owned by Tamara Gear and the shares  listed
     for Tamara Gear do not include the shares owned by Gavin Gear.

                                     - 12 -
<PAGE>


Item 12. Certain Relationships and Related Transactions.

     During the first quarter of 1996,  the Company  amended its  Certificate of
Incorporation to increase its authorized  shares of common stock from 20,000,000
shares, $.001 par value, to 30,000,000 shares, $.001 par value. PART IV

Item 13. Exhibits and Reports on Form 8-K.

      Exhibits
      --------
        3.a     Certificate of Incorporation of the Company (1)
        3.b     Amendment to the Certificate of Incorporation of the Company (1)
        3.c     Amendment to the Certificate of Incorporation of the Company (3)
        3.d     By-Laws of the Company (1)

        10.a    May 12, 1993 Agreements between the Company, Subsidiary and the 
                Subsidiary's Stockholders(2)
        10.b    Agreement of purchase of the two franchise stores(2)



(1) Previously filed as an Exhibit to the  Registration  Statement on Form S-18,
file No. 33- 42851-D filed with the Commission at its Denver Regional Office and
declared effective by the Commission on February 14, 1992.

(2) Previously filed as an Exhibit to the Company's Form 8-K dated June 1, 1993,
as filed with the  Commission  on or about  August 26,  1993,  and  incorporated
herein by reference.

(3) Previously filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for the year ended  December 31, 1995, as filed with the  Commission on or about
March 22, 1996, and incorporated herein by reference.

Reports of Form 8-K

     No  reports on Form 8-K were  filed  during the last  quarter of the fiscal
year covered by this report.

     Statements  contained in this 10-KSB as to the contents of any agreement or
other document  referred to are not complete,  and where such agreement or other
document is an exhibit to the Company's Registration Statement or is included in
the forms  indicated  above,  each such  statement is deemed to be qualified and
amplified in all respects by such provisions.

                                     - 13 -
<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                               ELEGANT ILLUSIONS, INC.


Dated:  March 13, 1996                       By:  s/James Cardinal
                                                  ----------------
                                                  James Cardinal,
                                                  Chief Executive Officer,

                                                  s/Tamara Gear
                                                  -------------
                                                  Tamara Gear, Treasurer


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.


SIGNATURES                          TITLE                            DATE



s/James Cardinal                   Director                       March 13, 1996
----------------
James Cardinal


s/Gavin Gear                       Director                       March 13, 1996
----------------
Gavin Gear



s/Tamara Gear                      Director                       March 13, 1996
----------------
Tamara Gear

                                     - 14 -
<PAGE>


                      SUPPLEMENTAL INFORMATION AND EXHIBITS

     Supplemental  Information  to be Furnished  With Reports Filed  Pursuant to
Section 15(d) of the Act by  Registrants  Which Have Not  Registered  Securities
Pursuant to Section 12 of the Act.

                                 Not Applicable.

                                     - 15 -